Idea of the day

US banks will kick off fourth quarter earning season on Friday, with JP Morgan Chase and Wells Fargo up first.

Conditions have been favourable for the banking stock investors as increasing interest rates, potentially lower taxes and less regulation have resulted in US banking stocks rallying. As earnings are about to start rolling in investors will be questioning whether the current lofty valuations are supported?

With this in mind there are certain key points that market participants will be watching out for as the banks release fourth quarter earnings and forward guidance.

1. Tax Reform – investors will want to know how banks will be affected by Trump’s tax overhaul. Whilst some banks have already announced one off hits to profit, the general consensus is that the tax reform will be favourable for banks over the long term – thanks to the cut of corporation tax to just 21% from 35%.

2. Trading compared to a year earlier – This will be a tough one to beat. Thinking back to Q4 last year Trump had just had a shock win in the elections – traders reset their portfolios and revenues soared. This will not be the case for the Q4 so trading revenue will inevitably be down and low volatility in the market has done little to help. Deutsche Bank has made some very bearish noises over trading revenue expectations for Q4, Citi and BofA slightly less so.

3. Loan Growth – despite healthy conditions, strong business confidence, and low interest rates, loan growth didn’t pick up in 2017. Average weekly business loan growth in 2017 was just 2.7% compared to 9.3% in 2016. Investors will be keen to see the bank’s forecast for these figures going forward.

4. Regulatory relief - this is likely to be a key focus. The big banks have already acknowledged that there has been a change in tone from those at the top government agencies. Previously rules and interpretation of those rules were increasing stricter and tighter, however the deregulation appears to be taking a more controlled approach than previously – which could make it more likely to succeed than in previous attempts. Deregulation is good news for bank’s profits as compliance costs are reduced, so any signs of this moving forward is expected to be beneficial for banks share price.

How? JP Morgan is due to report tomorrow. The bank has so far posted 27% gains across 2017 and looks set to continue to prosper under the favourable conditions in the industry. JP Morgan is currently trading 110.45, it trades above the 20SMA and 100SMA, with numerous technical indicators, such as MACD pointing to a strong buy.

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